A Case Study
TAX Savings Multi State Collections Made Easy for Specialist Builder / Contractor
Local Columbus contractors struggle with a range of issues. Sales TAX collection or rather quoting the right amount of sales TAX can be one of the more complicated Columbus bookkeeping services issues.
If done wrong, it can create excessive costs and penalties. This is especially true when work is done across several States.
One of our clients a local Columbus specialist builder / contractor, does regular work associated with home renovations, remodels, and updates. This can include sauna’s, wine cellars and over garage room additions.
It is a complicated business usually requiring products from multiple sources and various specialist contractors.
Usually, a 50% deposit is obtained by the builder, the balance payable on completion of the work.
Understanding NEXUS compliance and accurately calculating and keeping track of sales TAX was something the Columbus builder struggled with. What constitutes NEXUS for one State can be quite different for another State.
Small Business Bookkeeping Services Columbus – Specialist Builder Quotes Including TAX
Historically the client naturally prepared quotes for the customer that included sales TAX. The client simply assumed a 9.75% sales TAX and applied it to all quotes and invoices. On the face of it there was no problem.
When the customer approved the quote, the builder would then collect the initial deposit. At that point the price was locked.
When you file the sales TAX returns, depending on the State, you must tell the TAX authority all the counties where you had your sales. So, when a TAX payment was made, the builder made it based on what he thought was the right percentage, and what he had collected in sales TAX. He then discovered that what was calculated when he filed the return was different. Quite a bit different.
Bookkeeping Services Getting Started
As we first began to provide bookkeeping services work to this Columbus Ohio client, we first took the initiative to check with each States’ website. Trying to make sure the correct sales TAX was being quoted and collected.
However, it quickly became apparent that the amounts shown on each States‘ website often turned out to be inaccurate. It was not up to date, and did not include things such as city, county, district, and other sales TAX that often need to be combined.
Sales TAX varies by State and whether you have NEXUS in a State. Most business owners are aware of this. However, what a lot of owners do not appreciate is that it can also vary based on different locations within the State.
This resulted in an incorrect sales TAX collection from the customer and an additional TAX liability for the builder when he filed his quarterly sales TAX returns.
Incurring Interest and Penalties and a Big Time Waste
Due to this approach the builder was incurring interest and penalties on their sales TAX return. In addition, they were also incurring another $200 to $300 a month by under charging sales TAX. Over the course of a year that can really add up as he had to make up the difference plus there were additional unexpected sales TAX penalties and interest. This will hit any business’s profitability.
This also cost in bookkeeping services time and effort. In order to calculate the correct amount of TAX due to the State, each sale had to be checked on the State’s website for county, city, district, or any other region, it then had to be totaled and collated. This was a bookkeeping services monthly task, as trying to correctly calculate three months’ worth of sales TAX for each sale would be a herculean task. When we took on this account it took us 2 days a month just to get the calculations correct.
This particular client was on a strong growth ramp. Initially doing about $600,000 in revenue for their first year. As of writing this article they are set to hit a revenue run rate of about $8,000,000. The above savings are therefore based on a time slice. In reality, had we not solved this issue for the builder their financial liability could have been much, much larger over time and that doesn’t account for the cost in time and effort of getting the TAX returns submitted correctly.
Collecting the Right Sales TAX – A Common Problem for Small Business
At Columbus Bookkeeping & Accounting Services we had encountered this problem before. As specialists in bookkeeping for builders we see incorrect sales TAX collection as a fairly common problem.
Integrating with QuickBooks – Now Bookkeeping Services Get Efficient
To resolve the problem, we helped the Columbus client by implementing and testing automatic TAX compliance software integrating it with their QuickBooks bookkeeping software. In this instance our sales TAX software of choice was Avalara.
Avalara is a cloud-based software platform that automates the major steps of TAX compliance and integrates with QuickBooks. Sales TAX is calculated in “real time” via a secure internet connection ensuring sales TAX accuracy.
Implementing Avalara, a Bookkeeping Core Process
Implementing Avalara can be complicated as Avalara, like a lot of software, can do a lot of things. You must give it all the parameters; this means going in and setting it up to do the things you want.
You have to install it on the server and integrate it with QuickBooks. That way when you create an estimate or an invoice, Avalara comes in and calculates the sales TAX for you based on all the items you sell that are taxable. The quote process when generated in QuickBooks then has accurate sales TAX calculations via Avalara’s integration with QuickBooks. Just this simplified and reduced the cost of the Columbus client‘s overall bookkeeping services.
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All of that required quite a bit of configuring and we worked with Avalara’s implementation team to get the whole process set up.
Avalara has codes for different types of items and depending on how you code it determines how it is treated inside QuickBooks.
This means you must get and assign the right codes to get the right sales TAX calculation. In addition, you have to set up the TAX return process itself.
All in all, it was about two weeks of bookkeeping services work to get the whole thing set-up and working.
Then about another month of working through and resolving problems. For example, we had a few problems associated with reconciliation at the end of the month.
One common problem is that Avalara and QuickBooks treat things differently. This problem is common with QuickBooks and sales TAX software.
One of the first things we noticed for example is that QuickBooks shows taxable items as taxable sales for non- NEXUS States while Avalara treats all items for non–NEXUS States as non-taxable.
An example would be you have a sale in Nevada but no NEXUS in Nevada. Avalara, says, “Oh, okay, that’s not taxable“ but QuickBooks says, “It is taxable.“ That is because materials are a taxable item as far as QuickBooks is concerned.
Expertise Tip: These kinds of issues are common, and this is part of the reconciliation process that we perform each month to ensure that Avalara and QuickBooks are in sync. We have set up a procedure and spreadsheet to calculate monthly totals. We created custom reports in QuickBooks for all non-NEXUS sales. We then run reports in Avalara and recalculate the totals using the non-NEXUS sales figures from QuickBooks. If the amounts match up, then reconciliation is complete, and returns are approved in Avalara for filing.
Determining NEXUS, a Bookkeeping Services Challenge, or a Simple Process?
Determining NEXUS is another complication. One would think it is pretty straight forward. However, when you get into it you realize that each State has its own rules and regulations. For example, if you want to sell an item in Georgia, you need to have a seller’s permit and as soon as you do $100,000 in sales you have NEXUS. Some States are threshold, some are transaction based, some require a physical presence, others can do all of these. In another State you may only need to have an actual presence there. https://www.avalara.com/us/en/learn/guides/state-by-state-guide-economic-nexus-laws.html
There is also the question of whether that State is a destination or origination-based State. Origin-sourced sales are TAXED where the seller is located, while destination-sourced sales are TAXED at the location where the buyer takes possession of the item sold. Some States are both origin and destination based. Kansas, however, says, “I don’t care where you’re located, if you’re going to do work here, you have NEXUS here.” Kansas has no threshold and any sale in their state triggers NEXUS. And another scenario is that some States have no statewide sales TAX but allows local jurisdictions to charge sales TAX. That is where Avalara comes in and makes that determination for you.
While there are also States that allow you to do sales up to a certain threshold, some count the amount of transactions, once the transaction limit has been reached, then they start collecting sales TAX. When you do a sale inside QuickBooks, thanks to Avalara, it is going to tell you if you are nearing that States threshold or transaction limit.
Expertise TIP: If you have already been selling in a particular State, we will work with you to determine if you already have NEXSUS when starting with Avalara, they will not make that determination for you. Going forward, they will then track when you are nearing NEXUS in another state. I.E. If you had sales for 6 months of the year prior to coming on board with Avalara, they will only start tracking from the time of implementation. It is important to know where you stand with NEXUS prior to using them and not relying solely on them from the beginning.
For our Columbus based bookkeeping services builder client, implementing Avalara eliminated the concern for ever-changing, impenetrable rates, rules, boundaries, exemptions, TAX holidays, reporting requirements and filing deadlines. The builder was very pleased with our recommendation and service as they are now able to calculate sales TAX accurately all the time. We implemented and configured the software to accurately calculate sales TAX on all customer quotes and invoices.
Immediately this saved the company about two days a month trying to calculate the correct sales TAX. Plus, additional TAX liabilities and penalties for under collected consumer sales TAX as well as paying the difference between TAXES collected and the actual TAX bill.
Expertise TIP: Some States will want you to make monthly pre-payments and submit a TAX return quarterly. We will make sure Avalara is set up with the correct filing status for your business.
As Avalara now remitted the sales TAX and filed the appropriate TAX returns for each State this lowered the builder’s overall bookkeeping overhead and fees as calculating the monthly TAX payable and preparing TAX returns was no longer a manual process.
The Bottom Line – Collecting Sales TAX Made Easy Through Intelligent Bookkeeping Services.
Expertise TIP: In order to make sales in each State you work in, filing the correct documentation is critical.
As the builder’s business grew further into multiple States, there was an obvious requirement for a more accurate solution to manage the requirements of demanding sales TAX obligations imposed by state, local, and other TAX authorities around the U.S.
In this case once we took over doing his books and implemented Avalara, it was the perfect solution for the builder’s growth arc. Avalara actively monitors your business activities and alerts you when you are about to establish TAX obligations in new places, based on that States individual and ever-changing NEXUS laws.
Beyond saving money directly from overpaying, or underpaying, sales TAX, it also eliminated the risk of fines, interest, and penalties for non-compliance. Let us not underestimate the value of peace of mind that comes with knowing you are doing things correctly and your business is automatically keeping up with changes in the law.
Another happy client!